We recently compiled a list of the 8 Best Undervalued Energy Stocks To Buy According to Analysts. In this article, we are going to take a look at where Chesapeake Energy Corporation (NASDAQ:CHK) stands against the other undervalued energy stocks.
Following another eventful year for the global energy sector, 2024 continues the trend of disruptions, headwinds, and opportunities. The previous year concluded with a landmark agreement at COP28 to reduce global methane emissions, a significant contributor to worldwide emissions. Despite being one of the world’s more mature industries, the international energy sector remains incredibly dynamic, with journalists, governments, investors, and analysts paying special interest to developments within the industry to assess their potential impact on the global business and economic landscapes.
Energy stocks experienced negative returns in 2023, but have risen in early 2024 alongside the price of oil. Generally, energy stock prices tend to track changes in energy prices. For instance, when energy prices peaked in 2022 due to Russia’s invasion of Ukraine and the lingering effects of the COVID-19 pandemic, many companies in the energy sector saw gains. Global production levels are also crucial to the sector’s performance. While U.S. oil production has been relatively high in recent months, many OPEC+ countries have capped production. Although demand for energy products continues to grow, there is uncertainty about whether supply will increase accordingly.
On another front, global investment in the energy transition has increased tremendously over the years, hitting the $1.8 trillion mark in 2023, flagging a 17% rise from the previous year, according to BloombergNEF. However, this amount is a fraction of the $1.77 trillion invested globally, with the business case for adopting renewable energy becoming more compelling for companies. Conversely, the oil and gas sector has seen a significant surge in merger and acquisition activity, with over $155 billion in deals in the fourth quarter of 2023. This total surpasses the combined value of deals from the previous five quarters. Facing challenging market and economic conditions, oil and gas companies—especially those in upstream, midstream, and oil field services—are expected to continue this consolidation trend into 2024.
Oil prices bottomed on June 5 due to an unexpected increase in U.S. crude stocks and a larger-than-anticipated rise in fuel inventories, heightening demand concerns amid potential supply growth later this year. At the time data from the U.S. Energy Information Administration showed that the U.S. crude stockpile rose by 1.2 million barrels in the week ending May 31, contrary to analysts’ expectations of a 2.3 million barrel draw. However, this build was less than the American Petroleum Institute’s report, which indicated an increase of over 4 million barrels. On the other hand, gasoline inventories increased by 2.1 million barrels, exceeding expectations of a 2 million barrel rise. This contributed to demand concerns, as the week reflected fuel usage around the Memorial Day holiday, traditionally seen as the start of the U.S. summer driving season. Oil prices increased by about $5 since then, currently trading above $78 per barrel.
The energy industry is not only massive but also holds significant growth potential. According to the United Nations, achieving the goals of the Paris Climate Agreement will require an annual investment of $2.4 trillion in energy systems over the next 11 years. Illustrating this growth, a report states that the global renewable energy market, valued at $899.24 billion in 2022, is expected to grow from $1,050.31 billion in 2023 to $3,637.99 billion by 2031, at a CAGR of 16.80% during the forecast period.
The current year promises to be another rollercoaster ride for the energy industry, raising critical questions about the feasibility of achieving the net-zero targets outlined in the Paris Agreement. Commenting on this, Rystad Energy CEO Jarand Rystad remarked:
“Last year was a pivotal one for the energy world. Renewable energy capacity expanded rapidly, keeping up with global power demand growth for the first time. Solar PV needed to grow by 220 gigawatts (GW) in 2023 to track the 1.6 DG scenario for global warming. The latest figures now indicate that it could end up at above 400 GW. And there is now supply chain visibility for an annual delivery of 1,500 GW. Global coal demand most likely peaked in 2023, and clean energy technologies are now more affordable than fossil fuel alternatives in most parts of the world. Fossil fuels will, however, remain an important component of the energy mix for the next decades. Countries like Denmark, Finland and Portugal are close to achieving zero carbon power sectors, successfully dealing with the intermittency challenge of renewables. Still, there are also setbacks in renewable deployment, like the cost inflation seen in offshore wind, and governments will need to step up stimulation to get these sectors back on track. This year could see more inflection points in the energy transition, with impacts felt well into the latter half of the decade.”
With this context in mind, we are now talk about Wall Street analysts’ best undervalued energy stocks to buy.
Our Methodology
To compile our list of the best undervalued energy stocks to buy according to analysts, we used a stock screener to identify energy stocks with price-to-earnings (P/E) ratios below 25. We then ranked these firms based on their average analyst share price target upside. For each of these energy stocks, we have also included hedge fund sentiment. Why do we track stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial view of oil & gas drilling rigs in a an underground reservoir.
Chesapeake Energy Corporation (NASDAQ:CHK)
Average Analyst Estimates as of May 28: $106.75
Average Analyst Upside as of May 28: 17.31%
P/E Ratio: 12.25
Founded in 1989, Chesapeake Energy Corporation (NASDAQ:CHK) focuses on the exploration and responsible development of key assets in three major U.S. oil and gas regions: the Eagle Ford, Haynesville, and Marcellus Shales. The company’s headquarters are located in Oklahoma City, a significant hub for the natural gas and oil industry.
At the beginning of 2024, Chesapeake Energy Corporation (NASDAQ:CHK) announced that it was set to merge with Southwestern Energy in an all-stock deal valued at $7.4 billion, which would position Chesapeake as the largest natural gas producer in the U.S. The merger will add 7.9 billion cubic feet equivalent per day to Chesapeake’s production from Southwestern’s operations in the Appalachian shale formations and the Haynesville basin in Louisiana. However, in April, Chesapeake Energy Corporation (NASDAQ:CHK) announced that the proposed merger had been deferred to the latter half of the year following a second request for additional information from a U.S. regulator. The merger is now under FTC scrutiny, highlighting a broader trend of U.S. lawmakers demanding more rigorous examination of multi-billion-dollar deals in the oil and gas sector.
The string of bad news continued for Chesapeake Energy Corporation (NASDAQ:CHK) as the company missed Wall Street estimates for first-quarter profit in early May. Persistently low natural gas prices significantly impacted the company’s top-line results. Natural gas prices fell by 20.4% in the first quarter compared to the same period last year, with high inventory and weak demand leading producers like Chesapeake to reduce gas production. With that in view, Chesapeake Energy Corporation (NASDAQ:CHK) reported first-quarter EPS of $0.56, falling short of the analyst estimate of $0.60, while revenue for the quarter was $1.08 billion, missing the consensus estimate of $1.28 billion.
As of the end of the first quarter of this year, a survey by Insider Monkey of 919 hedge funds revealed that 52 had invested in Chesapeake Energy Corporation (NASDAQ:CHK). The largest stakeholder among them is Oaktree Capital Management, led by Howard Marks, with holdings valued at $620.39 million.
Overall CHK ranks 6th on our list of the best undervalued energy stocks to buy. You can visit 8 Best Undervalued Energy Stocks To Buy According to Analysts to see the other energy stocks that are on hedge funds’ radar. While we acknowledge the potential of CHK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CHK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
